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Minda Corporation Ltd
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Ladies and gentlemen, good day, and welcome to Minda Corporation Limited Q2 FY '21 Earnings Conference Call hosted by Indsec Securities & Finance Limited. [Operator Instructions] Please note that this conference is being recorded. I now hand the conference over to Mr. Saral Seth from Indsec Securities and Finance. Thank you, and over to you, sir.
Good evening, everyone. On behalf of Indsec Securities and Finance Limited, I welcome you all for the Minda Corporation Q2 FY '21 Results Earnings Call. I would take this opportunity to welcome the management team from Minda Corporation, and thank them for giving us this opportunity. Today, we have with us Mr. Ashok Minda, Chairman and Group CEO; Mr. R. Laxman, Group CFO; Mr. Neeraj Mahajan, Group Chief Marketing Officer; and Mr. Bikash Dugar, Lead Investor Relations. I now hand over the call to the management for brief opening remarks, followed by the Q&A session. Over to you, sir. Thank you.
Thank you, Saral. This is Ashok Minda. Good evening, ladies and gentlemen. I welcome you all to the second quarter of financial year '21 earnings conference call of Minda Corporation. I would like to thank you all for joining us on this call and hope all of you are doing well. The auto industry in second quarter of financial year '21 saw sequential growth in demand as economy recovers from adverse impact of COVID-19. 2-wheelers, tractors and passenger vehicles saw revival in production and sale volume, indicating preference for personal transport and growth in agriculture sector. In light of these circumstances, I am pleased to report that Minda Corporation delivered consolidated revenue from continued operation of INR 656 crore, a growth of 17.5% on year-on-year basis. It should be noted that over the same time, the industry declined by 6.2% on year-on-year basis. Our growth was driven by 3 major factors: increasing in wiring harness content in 2-wheeler category, increasing in aftermarket sales and increase in exports. Our focus on cost optimization and higher operational efficiencies has helped us in moving to double-digit EBITDA margin and the net cash positive position, which will be explained further by our Group CFO, Mr. R. Laxman. Focus on enhancing customer relationship has helped us win repeat businesses and also new business from our existing and new customers, which will be further explained by our Group Marketing Officer, Mr. Neeraj Mahajan. We recognize and appreciate the efforts and the support extended by our employees during the challenging period in the health pandemic. We already have rolled back all salary cuts from September, which were earlier planned from October. With a focus on shareholder value creation, profitable growth and customer satisfaction, Minda Corporation Board of Directors has approved the appointment of Mr. Aakash Minda as an additional Director in the category of an Executive Director on the Board of the company with effect from November 5, 2020. The Board has also approved preferential issuance of equity share up to INR 83 crore at the rate of INR 70 to a fund managed by Phi Capital Management LLP, subject to approval of the shareholders at an EGM. Phi Capital, as auto industry expert on their advisory board, it has partners such as Mr. M. Lakshminarayan, Chairman of WABCO and ex-CEO of Bosch India; Mr. R. Haresh, who come from TVS family and is the MD of TVS and Sons; Mr. Sivaram, who is ex CFO and CEO of Punjab Tractor; Mr. Ravi Sud, ex-CFO of Hero MotoCorp. We expect to draw on this experience and expertise of the Phi Capital team to advise Minda Corporation and further its efforts of creating value for all of its shareholders. Phi will support us in identifying value-creation opportunities, performance management, financial planning and long-term strategy. Minda Corporation and Phi will work jointly to build sustainable business and create long-term shareholder value through operational partnership. Their investment in the company will only cement their commitment to help and support us in this endeavor. The fact that we have been able to get this investment definitely enhances our company's ability to look at larger investments, which will be important to fund our plans relating to developing and acquiring future technologies, competencies and investments. Now we shall begin detailed discussion on financial and operational performance for the quarter.With this, I hand over the call to Mr. Laxman, our group CFO. Over to you, Laxman, please.
Thank you, Mr. Minda, and good evening, ladies and gentlemen. I will now cover the quarter 2 financial performance of Minda Corporation. And I'll be referring to the slides that we have prepared for the presentation. And if such of those of you who may have these slides, I will also refer to the page number. I'll keep this presentation very short. And then the last part of the presentation will be handled by Mr. Neeraj Mahajan, our Group CMO. And thereafter, we'll open it for questions and answers. I'm directly jumping to Slide #3, where on the left-hand side of the slide, we have our summary, which is FY 2020 revenue, which is INR 2,800 crores, business verticals: Mechatronics; Information & Connected Systems; Plastics & Interior and Aftermarket. Key customers continues to remain our greatest strength. The who is who of Indian OEMs are our key customers. We have 30 manufacturing facilities. And of course, our very deep R&D capabilities, thanks to the SMIT R&D Center in Pune and multiple specialized R&D centers across India. Market cap as on September 30, about INR 1,700 crores. On the right-hand slide side, you will see the H1 FY '21 breakup of revenue as compared to H1 FY '20. By geography, roughly, it's the same over 85% of our revenue now comes from India, about 8% comes -- 9.6% comes from Europe and North America, and 4.9% comes from Southeast Asia. If we look at end markets, there is a change. You will see that about -- now about 55% of our revenue is coming from 2- and 3-wheelers. 19.5% of our revenues is coming from commercial vehicles, which is a dip from earlier 25%. And the aftermarket revenue share has substantially increased. Earlier it used to be about 12.9%, that has increased to 17.5% in FY '21. Passenger cars remain at about 7.7%. If one goes by business verticals, which is the last circle at the bottom on Slide #3. You will notice that Mechatronics and Aftermarket together contribute 57.8%. Mechatronics contributes about 40%, and Aftermarket is about 17.5%. Information & Connected System contributes the balance, roughly 42%. In our categorization, as of now, interior plastic is also part of the Information & Connected, it's a small percentage. Moving to Page #4. You will notice that in H1, all the figures are negative, the Indian auto industry itself selling by about 42% overall, with 2-wheelers going down by a same number, passenger vehicles going down much further and commercial vehicles going down by 56.9%, so the only small solace was the tractor business, which went down only in single digits. However, the Q2 numbers, which is in the second bottom of the slide, is giving a more reassuring picture in terms of green shoots. You'll see that the auto industry has gone down about 6.2% compared to the same quarter last year. 2-wheelers have gone down 4.8%, passenger vehicle 3.1%, commercial vehicle continues to go down further than others, which is 16.4%. And of course, tractors have gone up by 22.5%, and we are a beneficiaries of this. So in Q2, basically, we saw a month-on-month improvement, which has been positive, given the preference for personal transport restocking because of BS-VI and also that agriculture sector doing very well. However, we continue to face challenges in terms of the subdued economic environment, lower consumer sentiment and also the lockdown has not been fully lifted in all states. So to that extent, there has been some impact. Moving to the financials, which is on Page #5. In terms of the consolidated performance, this is a summary. Of course, more detailed is available on our website. If you see the first column, which is the quarter 2 FY '21, which is the first quarter we are having in, what shall we say, kind of a post-COVID era, we have posted a revenue of INR 656 crores, about INR 7 crores came from other income, largely FD income, interest from FD income, and our EBITDA was about INR 66 crores. So INR 66.5 crores EBITDA translated to about 10.1%. We had a PBT from continued operation of INR 36.6 crores and a profit after tax of INR 25.8 crores. So if we compare this to what was reported last year Q2 FY '20, which includes that a lot of other businesses, those sales have been down because of the loss of business at our European operations. The EBITDA margin has definitely and decisively moved to a double-digit EBITDA margin number. And I will come to it and explain further as to why we feel that this double-digit EBITDA margin is sustainable for us going forward in the post-COVID era. The half yearly numbers, which is the second last column of FY '21 at INR 834 crores and an EBITDA of INR 46 crores includes almost a washout period for Q1 and good performance for Q2. So the average of that has brought us down to 5.5% EBITDA. Overall, it is an INR 9.6 crore loss at the end of the H1. So effectively, what we are saying is we have largely compensated for the losses of Q1 by way of the profits for Q2. And therefore, going forward, the post-COVID era only looks positive for us. That is on Slide 5. Now moving to Slide #6. We are analyzing the quarter in terms of revenue EBITDA impact, more detailed description of what we covered in Slide 5. If you look at the revenue of INR 656 crores, you will see that the overall revenue is lower because obviously there's a discontinued operation of Minda KTSN. Apart from that, we continue to show growth of about 17.5%, if you exclude that, as Mr. Chairman also pointed out. Our transition from BS-IV to BS-VI has also led to increase in wiring harness content. And our aftermarket and exports have done well. In the sense, in fact, our aftermarket sales during Q2 has jumped by about 32%. And our overall exports from India overall has jumped by another 18%. So these 2 have really contributed to our increase in sales. And as we said, these -- each of these small engines are helping us in kind of giving a more consistent performance irrespective of one segment doing better or other. In terms of EBITDA margin, about 10.1% in Q2 FY '21. Of course, there has been a favorable impact because of discontinued operations, and the continued operations of EBITDA did get impacted by an adverse product mix and labor productivity because of COVID as well as new labor coming in and the transition from BS-IV to BS-VI. It was also challenged by raw material indexation where copper prices shot up, but that's more of a lag effect, and that will get compensated in the next quarter to come. So in summary, the EBITDA margin has negatives, which are not going to continue in the future in the sense that the labor productivity will only go up. We expect the product mix to only get better because commercial vehicles have been down, and now we are seeing some amount of stabilization in the next few quarters. And the transition to BS-VI is complete, and the lag effect of raw material indexation will only get impacted positively going forward. The net profit at INR 25 crores has taken an impact of the JV losses also, which is about JV share loss of about INR 16 million as against a profit of INR 2.9 crores or INR 29 million in the same quarter previous year. There has been a tax effect also in that in the quarter 2 of last year, we had taken a much smaller tax provision because the effective tax rate changed, and we have taken quite a bit of provision in Q1. So therefore, Q2 of FY '20 was less and, therefore, if you're comparing it to the same period, it looks as if in the current Q2, we have provided for more tax. But of course, our belief is in the whole year follow-up, this will get nullified.Coming to Slide #7. You will see that on the quarterly performance in the left-hand side graph, the Mechatronics has been supported by a high Aftermarket growth and high exports growth. Our Aftermarket, which grew substantially well, has helped Mechatronics division do very well because half of the sales of Aftermarket comes from Mechatronics. And they posted a 12.7% EBITDA margin in Q2, which is again credible given the fact that there's just some out of COVID. As compared with the same quarter in the previous year, yes, there has been a dip from 13.8% to 12.7%. And that is definitely because an adverse impact of the high cost of operations due to COVID. We expect this to go away in the next few quarters. Favorable impact, as we had mentioned, is higher Aftermarket as well as exports. The division and the company as a whole has gone through various cost-cutting measures, that is also reflected. The Information & Connected Systems continues to be a challenge for us. Why am I saying challenges because you will see that though sales have gone up because of BS-VI, our -- we had mentioned that our ability to reach the EBITDA margin will take about 2, 3 more quarters. So you see a dip from 9.6% to 6.7%. Some of it only one-time because the raw material indexation, because of the lag has definitely costed us a good amount of this delta between 9.6% and 6.7%. And we see that coming back in Q3. Apart from that, again, this division also continues to take various cost-cutting measures across their factories. Moving to Slide #8. Our net worth stands at INR 950 crores. Our gross debt stands at INR 426 crores; however, the cash equivalent is more than the gross debt. And therefore, our net debt figure is negative, in the sense, we are on a net basis surplus. And therefore, the net debt to net worth ratio doesn't hold anymore. Ratings absolutely consistent. We continue to be rated by India Ratings and Research as well as CRISIL. India Ratings gives us AA-, and CRISIL gives us a IND A1+, and for long-term, they give us A+ stable.So that's the quick summary of the financials. Then I'm going to request my colleague, Mr. Neeraj Mahajan, to take us through the business orders that we have won the awards in the CSR section and, of course, his views on the market. And thereafter, we are happy to take questions. Over to you, Mr. Mahajan.
So thank you very much, Laxman. Good evening, ladies and gentlemen. My name is Neeraj Mahajan. I'm the President and Group Chief Marketing Officer. So I would say in all compared to Q1, Q2 has been very, very productive in terms of order booking. To take you through the slides, some of the colleagues in this call those who have that information in your hand can refer to that. I'm pleased to share that lifetime order book for replacement for the company has been close to about 25,258 million. And new order book has been for 5,149 million in Q2 F '21. It's a good situation to be in, in terms of overall order book right now. Let me go more into details about it. Our business vertical one, which is Mechatronics. In quarter 2, we have made a lifetime order book worth 5,365 million. And year-to-date, lifetime order book was in excess of INR 9,340 million. So naturally, in the first half, as we all experienced a challenge of first 2 months with the businesses struggling to complete activity. So -- but the second half has kind of all the pending orders were cleared by the OEMs, which they were -- we were negotiating with, thanks to our relationship, which is growing into stature with them. If we confirm about the replacement, some of the key orders which have been received from replacement and new Board, our Mechatronics division in the replacement market has got a very large 2-wheelers security system lockset-related business, which is touching about 2,850 million lifetime orders. However, our new addition order book has been also healthy. We have bagged our 2-wheelers order again, for the security system lockset, lifetime order of about 1,400 million. We additionally got ICAS division Tier 1 and OEM order book, very healthy from various domestic and international customers for overall order book value of 478 million. We got the order book for tractor industry, for starter motor and alternator division of us, for 114 million lifetime orders. These are the orders which we have been working upon in terms of expanding our portfolios. These orders will be executed from next year onwards up to 2023 and beyond. If I look at it from Information & Connected Systems-related development in terms of new order book, as Laxman has mentioned, our impact of the cost increase is hurting us in that regard. Though we have booked INR 25,000 million worth of orders in quarter 2, Q1 order booking was low. Hence as of date, YTD 2021, we have booked about 28,270 million orders. To give you more insight of the businesses in Information & Connected Systems, the replacement orders in the commercial vehicle space, we got close to about 6,222 million. We got 2-wheeler replacement orders for our existing customer for a very large value of 15,531 million. This was a very prestigious order for us in combination of 2 customers. But we have also been making excellent progress now in our tractor and commercial segments where we have got new orders, for Minda Stoneridge on instrument cluster for 749 million and also for commercial vehicle, 220 million from the commercial vehicle segment, respectively. Plastic division has started to show progress in terms of its India operation now after KTSN. Since, we have booked -- in Q2, lifetime orders worth INR 42 million in Q2 and INR 176 million since year-to-date. This is from a very large commercial vehicle Tier 1 customer. And we are expanding our portfolio in lightweighting and plastic engine components with them in this space. For export, it has been a good business in terms of getting both new and replacement. For wire harness as well as our expansion into [indiscernible] at a higher profitability as well. So in case of replacement and for the new order, put together, we have INR 1,760 million lifetime order book for exports. I would say in all, the order book situation for YTD looks very promising for us to have better order book or better situation for years coming ahead.I'll move to the next slide, to just share a very broad outline how Minda Corporation has also been recognized and doing other activities related to CSR and others with the foundation we have. The -- one of the prominent activities which was significant in the media as well was Thar introduction. And I'm very pleased to share that we have 9 product segments serviced by Minda Corporation, various companies in this case, including wire harness. One of the most, let's say, advanced cluster, which is instrument cluster, which is supplied from our side. We also had EOT sensor, air vent, door sash, also in terms of the glove box and various other components going into the product. And we are very excited the way the order booking is coming in for this, and we wish success for Thar in the coming days.Minda Stoneridge was also recognized for Q1 quality award coming in from Ford Motor corporation, for their -- from their -- for the supplies which we are providing to them. And we won the -- also the QCFI Kaizen Competition award for Minda Stoneridge over and above. This year, most of the OEMs have so far not come out with their award announcements because of COVID, because most of these awards are announced during the annual supplier convention. Hence the awards in this regard is not being, coming forward so far from their side. But be assured that Minda Corporation, with its state of our plant and its delivery and quality, is going to be moving towards more awards being recognized or given to us from our customers going forward as well. In terms of our CSR initiatives, I'm very pleased that as an organization, while the entire world is fighting with COVID, our foundation, in association with Wadhwani Foundation, provided food and essential commodities distribution through Sadhbhavana projects to Indian Army in Jammu region. That was a very, very appreciated effort from Indian Army side as well. We also produced masks to service the different segment of society. Over 16,000 masks were produced by our Pantnagar facility of Aakarshan, which is our -- which is a assistance center for local employment and training providing facility. We also had virtual classes completed for the location. Unfortunately, this year, the physical one could not take place. So all students would also be covered through the same. And we are also trying to sensitize them through the COVID-19 program using Wadhwani Foundation facilities. As far as the market outlook in general is concerned, let me share with you, most of the OEMs have produced a very, very robust volume, especially for 4-wheeler and 2-wheeler alike for readiness on festivity and Navaratri season has gone very well from the retail sales side. We are keeping a very close watch at this point of time for the November month requirement. The schedules are extremely healthy, which shows the confidence from the customer about the retail opportunity, which we are going to have during this festival season. However, as an organization, we are keeping very close watch on both market as well as our cost to ensure that we, as an organization, should be able to perform among the peer group in the petrol category. That's all from my side in terms of sharing of information on our order book. I'm available for Q&A post that. Thank you very much.
Shall we open the floor for questions? Thank you very much. We'll now begin the question-and-answer session.[Operator Instructions] First question is from the line of Pritesh Chheda from Lucky Investment Managers.
Yes. Am I audible?
Yes, go ahead, you're audible.
Yes, sir, a few observations. So the current quarter number are adjusting now for the Minda KTSN, am I correct?
Yes.
Yes, so just an observation. I'm a little bit perplexed as to why when an asset is sold, like we'll see drop in depreciation or changes in other expenditure lines. If you could give some comment there? And second, the gross margin reduction that I see, is it a function of the BS-VI product line supply? If you would enlighten us on these areas?
Yes. Sure. So 2 points: One is the reduction in gross margin is definitely -- couple of reasons. One is in the wiring harness, the shift from BS-IV to BS-VI has costed us our gross margin reduction. Some of it is temporary, like the labor productivity or raw material indexation. And some of it will take a little longer, which is the change in product mix where we used to heavily supply to commercial vehicles, which was a slightly more profitable business. So that's the answer to your question. Coming to depreciation, Pritesh, the depreciation part, yes, in die-casting, et cetera, we have been expanding and there will be a small lag in catching up between depreciation and the sales. Other expenses partly has increased because of specific COVID-related challenges and we do not see that to be a very sustainable number.
So the -- so I can see a 200 bps reduction in gross margin and EBITDA margin at about, I think, 10% for the quarter. We had, during the Minda KTSN call at the time of doing the transaction had done a call and called out that the margins in the business should comfortably be about 11% to 12%, right? So where are we on that journey? And if you could give some direction on the gross margin expansion incrementally and EBITDA margins incrementally?
I'll talk about the EBITDA margins -- thanks, it's a good question. And I'll talk about EBITDA margins. Gross margins do get impacted because of the mix, et cetera, whereas EBITDA also captures the savings that we do in fixed costs as well as all other points with respect to the operations. Now EBITDA margins, we have -- I believe we have only moved toward a double-digit EBITDA margin. Now moving from 10% to 11% and thereafter is a quarter-on-quarter or a season-on-season exercise. And that is something which we believe that it will steadily increase because the challenges are behind us in terms of structural challenges. And the COVID-related points, which we are seeing green shoots across segments that we are strong in. And I would request Mr. Minda also to add his views in terms of where we are going in our journey. But Pritesh, my point is that in terms of margins, we are definitely moving towards consistent double-digit EBITDA.
As Laxman mentioned, and we have shown in the presentation also, that one area is the indexing, which is one-time impact in this quarter, which has impacted. The indexing impact is a good amount, which is definitely not going to happen in the next quarter, not that significantly. The another is the month-on-month, there will be an improvement in labor productivity. So that will also improve the EBITDA. The product mix, which the passenger -- the commercial vehicle, that will also add better margin product and that will also add EBITDA margin. And another area is that the BS-VI to -- BS-IV to BS-VI, the localization although it is a little longer, but there is a good content of imported material. And we are in the process of localization. That will also give us a benefit in reduction of the raw material cost. And all those factors and that will affect -- that will help us not only sustaining the double-digit EBITDA margin, but also improve in all those incoming quarters.
And I couldn't gather your answer on the depreciation side. So ideally, the depreciation should reduce, right, when you have sold such a big asset outside India, which was 25 -- 1/4 of your sales?
No, no, depreciation is a apple-to-apple comparison. So if you see -- let me take an example. If you look at our June quarter, depreciation is about INR 20 crores and September has gone up to about INR 24 crores. The reason is because June, because of lockdown, et cetera, it was a one-shift depreciation. And now we are back to our 2 or 3 shifts depending on how the plants run. So I think it will be better to look at a couple of quarters' numbers and full year numbers, because Q1 and Q2 as well as this post-COVID ramp-up has distorted comparisons a little bit.
And sir, lastly, I'm just seeing the press release, there is this fund raise of 1.18 crores equity share, INR 83 crores raised. Can you -- what is this? And why is it done?
Can you say that again, sorry? Sorry, Pritesh.
In the release, there is this fund raise of INR 83 crores. So why is it done?
So effectively...
I would also -- Laxman, I will -- see, the fund or equity fund raise and diluting at this price, that we are looking at the long-term benefit of investors, such as financial investors, given the value addition, expected that we believe this is a small dilution at this current price. And we believe that this Phi Capital contribution to the company will far outweigh the small dilution that is being currently proposed because, as I mentioned in my speech, that Phi Capital has auto industry expert on their Advisory Board and in investment team. And we expect to draw from this wealth of experience for the company benefit. And so the investment in the company is cementing of their commitment and pricing is a function of timing and what we get in return. And we believe that this investment and this will help us to create a long-term sustainable value to all the shareholders.
Next question is from the line of Riddhesh Gandhi from Discovery Capital.
Just a couple of questions. If you could just emphasize again for us what value addition you're expecting? Because as per at least our analysis, you have effectively sold INR 80 crores of equity at $0.50 on the dollar. And therefore, effectively -- and I mean I just can't understand why you would dilute equity at this price, that too to a private equity. It isn't like it's a strategic who are giving you orders on the table or any of that. And I would also like to understand if there's any kind of conflict of interest and if the promoters are also -- actually have any investments in this private equity entity at all?
Sure. There are 2, 3 questions coming out of that. Although there is no pressing need for the funds, it definitely enhances the company's ability to be bigger and look at larger investments. But yes, there is no pressing need for the funds. But we have the plans to go to the next level with future technology competency and potential investment. So the funds can be a little more beneficial and to place certain risks. The basic is that as I mentioned during my speech, this is how to build a sustainable businesses and create long-term shareholder value through their operational partnership. And that is what is -- we are seeing that how and we should be aligned with them and take their wealth and their expertise in different, different areas to put together will greatly benefit all the existing shareholders in enhancing the value of their holdings. This is what is -- we will do that.
And is there any kind of conflict of interest? Are you an investor also in actually Phi Capital at all? Do you have any investments in the AIF, in that fund?
There is no conflict of interest, Riddhesh.
So we don't have -- so I mean the promoter or the promoter interest have no investments in the AIF? Is that right?
Yes.
What is AIF?
Whether -- Ashok Ji, whether you have invested in their fund?
No, no, not at all. Not at all. That is -- not at all.
Okay. Okay. And sir, the other question is we also saw that Laxman has resigned, just wanted to get some degree of granularity on the reasons behind it? Because obviously, he has been instrumental also and has given investors a lot of comfort. So if you could just actually emphasize to us the reason of the resignation?
Yes. I think Laxman can answer this question well.
Yes. And Ashok Ji, you can add after that.
Okay. Let me start. Yes, since last 3.5 years, Laxman has been operating out of Gurgaon. Left his family, who continue to be based out of Mumbai to various family obligations, which can be very challenging at times. And then Laxman has a desire to pursue the things which is closer to his heart. And that is why Laxman will add more, and you know all that, Laxman has been in our Board since the last 10 years. And in 2017, he became a whole-time Executive Director of Spark Minda Group, in the capacity of Group Chief Financial Officer. So that is why we decided, myself and Laxman, and that he will continue to be in the Board of Minda Corporation Limited in the capacity of Non-Executive Director. This is what we -- Of course, Laxman over to you. You can add more.
Yes. Thanks, Riddhesh, for that question, and it's a pretty personal one and I will share with you. I have enjoyed the last 3.5 years or 3 years and 8 months; however, physically, it has been very, very taking a toll, in the sense I've been flying every week into Bombay and back from Gurgaon. So -- and post-COVID, it's just made it even more difficult. And then with the family, finally, we decided to settle back in Bombay. So it's a pure decision based out of family compulsions, nothing else, nothing more, nothing less. I'm absolutely continue to be a cheerleader for Minda Corporation and I will continue to be -- I mean thanks to Mr. Minda's point, I will continue to be on the Board as a Non-Executive Director from 31st of December.
And sir, last question, with regards to the private equity investment, is it subject to approval of all shareholders or all shareholders, excluding the promoter? Is it a majority or a minority which is needed?
So my answer is I don't think the promoter is an interested party in this at all and we will go exactly as per the compliance, Riddhesh.
Next question is from Chetan from AlfAccurate Advisors.
Sir, my question is -- I have 2 questions.
Who is speaking, sorry?
It's Chetan. Sir, I have 2 questions. Firstly, so what is the private equity player bringing on the table for us in terms of immediate orders or anything? Or what kind of advisory or cost benefit can we get from their advice or consultancy in our business? Because...[Audio Gap] a price of INR 70, and we already have a net cash balance sheet, so why dilute this? This is the first question.
Okay. I have already replied the same thing. And Laxman, if you can add further what I have explained before.
So my addition to your points, Mr. Minda, is not too many. But Chetan, I will say this, that point number one is there is a lot of value that a specialized investor brings to the table in terms of expertise, in terms of attracting the right long-term -- further long-term investors, strategizing capital allocation, okay, and developing unique strategy for us. There were a lot of things that we can probably learn from industry experts and the current private equity fund does have a very, very credible bouquet of industry experts in it. And for that and the entire value-add that they give and there is a commitment that one has to kind of put in terms of a dilution, which is, I would say, small, because it's less than 5%, I think it would benefit entire -- a lot of shareholders. So to that extent, I would say, and of course, additional money gives us more leverage to do larger investments, but that's the second point.
Okay, sir. Sir, second question is with respect to RM indexation. So by what time line would you expect this RM indexation to be passed on completely? And what could be our EBITDA margin guidance from year on or next year, not for the immediate next quarter, but for next year, for next 2 years, what would be our EBITDA margin guidance, double digit, you have already alluded, but what sort of number should we look at? Can it be closer to 15%? Or what -- can you just help us with that?
See, first point on the RM indexation, it normally gets set or corrected in the next quarter. So you will start seeing it corrected in Q3. Of course, there's always a 1-quarter lag when corrections happen. That is point number one.
I think to the point number one, we have back to back arrangements with all the customers. But when the price...
Sorry, what would be the impact -- percentage impact of RM indexation on gross margin this quarter?
On an EBITDA basis, we would have -- it would have impacted us by maybe, I would say, close to about more than 150 basis points.
And this indexing is we have a back-to-back arrangement with the customer. When the prices goes high, we're impacted on the negative side. If the prices come down, we're impacted on the positive side.
Okay. Okay, sir. With respect to EBITDA margin?
I think to your second question, see, our long-term vision is to consistently increase the EBITDA margin. Our first, what shall we say, line was to cross the double-digit EBITDA and thereafter grow consistently. Whether in terms of a 2-year guidance, we are not yet sure to hazard a 2-year guidance right now. I think we should wait for a couple of quarters for the post-COVID numbers to stabilize. But we are very clear that we would like to consistently deliver double-digit EBITDA numbers. Mr. Minda, if you would like to add any point?
Yes. We expect that if the market continues to be like that and the reason what we have explained, the indexation, the localization, the productivity improvement, the aftermarket and the export sales growth, all will definitely increase quarter-by-quarter as a percentage of EBITDA margin.
Next question is from Mayur Milak from BOB Capital Markets.
So trying to understand 2 things, here. One that we are saying that -- so just trying to read it around for a private equity investment, are you saying that this was more like a deal, that they also said that they would like to benefit what they do for us in the long run by actually taking an equity in the company rather than upfront fees or something like that for their services?
No. That is why -- yes, the commitment that brings additional capital as a part of their commitment to achieve the common goal. And the common goal of all of the shareholders is how to increase the value of the -- value of the shareholding value. So -- and work jointly with the partnership. And as I mentioned, there is no pressing need of the fund. But we're jointly working with their team and which I have already explained and definitely, that is the objective to bring the shareholder value.
Right. And when you say no pressing need of the fund, I also want to understand, we had raised funds earlier as well and I think that still sits on our balance sheet as cash. So haven't we really found anything very interesting to really invest the idle cash? I mean at the end of the day, it depresses all the returns, right? I mean you're sitting with idle cash. So just wondered on that.
Yes, because I always feel it is better to pass the fund instead of spending somewhere which is not fulfilling the norm. So the most important is the capital allocation is very, very important. So if we'll get anything which will fulfill the norm and which will definitely increase the shareholder value, we are going to invest that money and that is what we have seen in the past. And definitely, we will invest there. Whatever the money we have in our kitty, we will be investing -- the allocation of that capital will be very carefully, to see that how it can benefit all the shareholders.
But do you have anything -- I mean since you're very clearly mentioning there is nothing immediately pressing, do we really look at any investments coming before FY '22? Or do you think it is something beyond next 12 to 18 months?
We are working for the various options. As I mentioned to you, it is a continuous process to identify within the portfolio, within the synergy, which we have instead of going here and there. And with a continuous process to identify, subject to fulfilling the norm and giving us the benefit in the shareholder. But it is a continuous process.
Yes. And will this private equity also assist us in identifying...
Yes, very much.
Investment opportunities?
Yes, very much. We have good experience in EV sector, which Laxman has mentioned. And definitely, they will also -- we will also -- because you have seen that their team, which will also support us and involve -- will also involve them to identify the products and the businesses where we can go from that investment.
Right. I mean, sir -- I think, yes, I do understand that you would have taken a rational call, but just trying to -- what probably is not getting registered from my understand from the call, I think from most concerns that we have is that we could have always had them as consultants and we could have rewarded them based on a percentage profit as and when they would have delivered. Diluting equity at this price, I don't know, it doesn't really gel with the overall need for this at this point.
See, basically, it is also possible [Foreign Language] the commitment is much, much more commitment because whosoever is going to invest, they wanted the return of that investment. So one is that. So hence, the equity dilution is less than 5%. But I believe that if the overall -- the holding of the shareholder is increased much more value than while this will be -- will not be -- seem very important. But the ultimate big goal and the target is how to increase the shareholder value. That is the objective of bringing that. It's not an investment; it is a partnership, operational partnership, which will increase the shareholder value.
And sir, last question on the operational side of the business. So are you fairly confident that the performance that we've seen in Q2 will now be a standard, at least for Q3, Q4 going forward, as in this should be the least minimum that we should expect if things remain the way they are?
I don't know, let's see -- we are crossing our fingers. Of course, it's the, how market moves after the next quarter. If the market remains the same or better, definitely, there is going to be a continuous improvement. That is -- that is quite sure. It all depends on what is going to be the market situation.
If I may add into this, this is Neeraj here. I think 2 factors will play strongly in this case for us. We are -- apart from the market how it is expected to do, is going to be 1 factor. But operationally, our organization is geared up to meet the demand. It is very evident. We have been able to meet most of our customer order booking, which is in there, which have been coming in. So in spite of COVID challenges, so -- and we have a very healthy order book, as I mentioned, at this point of time for the quarter 3 and quarter 4, both. So we are keeping ourselves ready so that if the market continues to remain stable and growing, we should be able to meet all that requirement, to answer that question.
In addition to that, this is a -- there are so many areas which is onetime expenditure, but also we will get the advantage of that. Adding all this, the market and all this continue to be there, definitely there is going to be the continuous improvement.
Next question is from the line of Chirag Shah from Edelweiss Securities Limited.
Hello? Hello?
Chirag, we can hear you.
Yes. Sir, again, sorry for coming back to the preferential announcement. Sir, this Phi Capital Board members...
Your voice is echoing, Chirag.
Sir, so the question is the Board members or the advisory member that you mentioned, of Phi Capital, they are the advisory members or they are the active members of that entity? Because it's a great experience as their active numbers would be more of a relevance to us, right? And if they are just an advisory nature, then how would it be? So can you just throw some light on that? The stalwarts of the auto industry that you, are they active members or are they advisors to Phi Capital?
No, they are an operational member with what I have told you, they're all operational. They have an advisory board, but as you very correctly said, we all know that an advisory board is for the advice only. But we have others, what the name I have taken, they are the operational member and that is going to be the advantage which we wanted to have and we want to take with this alliance.
Because the investment seems to be in the auto ancillary and automobile space, for Phi Capital. So if I can just [Foreign Language] how do you see the -- what are the areas that you see the expertise because on operations front, on client interactions front, or the -- this is primarily from [ upgradation ] perspective that they could help you out in that? So what are the key areas that you are looking at from the -- from their perspective? And are they likely to be joining on Board? Because you could have -- might as well taken them on Board without an equity offering given to them. We could have offered them a Board seat without giving equity offering to them.
Laxman, I was -- I couldn't -- if you have heard properly, can you reply?
Yes, yes, yes. Chirag, actually, I think it's a point where you're saying, one sees value in what we are bringing to the table. And there is a, what shall we say, dilution that needs to be done to ensure long-term commitment and for working on these objectives that we are talking about. So therefore, we think that it will -- end of the day, increase the size of the pie much more for everybody to partake, point number one. Point number two, to your question is, in terms of what they bring to the table, I think, as Mr. Minda mentioned, they are people who are very senior there and who are also having operational expertise, which they can bring to bear in terms of their experience on the table. And second, yes, strategic objectives to operational objectives, it covers the whole, what shall we say, plethora of areas that one can look at. Of course, we'll have to see that there is a right blend of what we have in-house and what we take from them in terms of expertise and -- but our belief as management is that it will be value-accretive in the medium to long term.
Sir, my question was also then why not offer the Board seat also? Because to better the Board seat, the active involvement would be far higher rather than just being an investor with...
I think that's a call, Chirag. I mean that's a call. And also, it is in terms of -- I mean we do have experts on the Board even now. So I think that's a call, frankly, Chirag. I mean we leave it at that.
Chirag, as you said that what is the strategy bringing in that these are the operational teams they have. And what is this, the technology side, the strategy side, the finance side, from EV side, manufacturing side, if you see there, the name that are said, they are the expertise in all these areas. In addition to that, they are investing also to show their commitment. And that is why, I would say, [Foreign Language] we have bring in and how to take it forward this company, and how to increase the share value of all the shareholders is the basic objective.
This is helpful, sir. The second question was on, I mean, coming back to the margin side. So in this, there are 150 basis impact on our gross margin because of commodity indexation issue? And this indexation issue is largely for which commodity? Is it primarily for copper or it is across because on die casting use for this other commodity, and wiring harness, you are -- the commodity is different. The indexation issue is coming in which commodity actually primarily?
If you have seen the presentation of Laxman, the business, the wiring harness business is the main reason. And there is copper in the wires with majority raw material content is the copper. So that impacted substantially there.
Okay. And when you say it is likely to revert, basically, you are indicating that in the next quarter, the indexation would not turn in your favor. So the impact would be to you on an immediate basis or there could be further lag, the reversal impact?
We have a back-to-back arrangement quarter-wise. So every quarter, if it is a increase, then as per the previous quarter, we will get our price amendment. And if it decrease, accordingly, our buying is less, then we get the higher price from the customer. So that is why I mentioned when the price will increase, we -- there is a disadvantage to the company. And when the price comes down, there is an advantage to the company. And this is a cycle that is what is the pricing indexing has been done with the customer.
So basically, if copper keeps on increasing, it keeps on getting postponed because we are by a quarter. If the commodity price keeps on increasing, then the impact will be seeing a similar lag, right? The copper has to be stable for this indexation benefit to flow in the P&L?
Laxman?
That is correct, Chirag. Any -- we need to reach a stable level of pricing. And it's not as important as whether it is high or low, but as long as it's stable, we'll be able to correct.
Thank you very much. Ladies and gentlemen, due to time constraint, that was the last question for today. I will now hand the conference over to the management for closing remarks.
Thanks for participating in the call. And looking ahead, we are cautiously optimistic for the second half of the year as the initial phase of festive period is indicating the sustenance of the demand. We have discussed a lot about this and I explained about my intention, and I wish definitely how we should do the consistent growth to achieve the expectation of all the shareholders. And then, I'll once again thank you for our entire Minda team, our customers, our vendors and all the stakeholders for their continued support, which has allowed us to navigate through these challenging times. Thank you. Ladies and gentlemen, thank you very much.
Thank you very much.
Thank you very much. On behalf of Indsec Securities & Finance Limited, that concludes this conference. Thank you for joining us. You may now disconnect your lines. Thank you.